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Spread Betting Margin
The Spread Betting margin is a small initial deposit that enables a trader to purchase a futures contract with a low down payment, but consequently magnifies the likely risk and return. Since financial spread betting is a margined product, you are required to pay a small deposit, also known as Notional Trading Requirement (NTR) or Minimum Initial Margin Requirement (Min IMR) into your account. For each deal you undertake, a margin figure is calculated based on the size of your stake multiplied by a bet-size factor, which differs from instrument to instrument. The benefits of margin trading are that if you make a profit, you have not had to pay the full cost of the investment, so you are able to take a much larger position than you would normally be able to, this provides the potential for significantly greater returns than traditional share dealing.
However, you should note that, just as the effect of margining can magnify gains, it also magnifies losses to the same extent when a position goes against you. You can quickly lose more than your initial deposit. Margin, also commonly known as gearing or leverage, requires you to be able to cover the entire contract value and any associated costs if the price moves unfavourably.
There are some rules investors should pay attention to while trading on margin:
- The awareness of the bet-size factor before placing a bet.
- Some broker firms offer interest on the credit balance you hold in your account, so it's always best to keep your account pumped up with funds.
- The margin percentage required by the broker may sometimes be bigger than trading the actual futures.
With some companies you must also be able to maintain the required margin at all times, which may involve topping up your initial or subsequent deposit if the cash balance falls during the period of the contract. This is sometimes known as variation margin. Therefore it is recommended that you stay comfortably within your margin limits to leave room for intra-day price movements across all of your positions. If your position moves in a profitable direction then you will free up more margin. You can use this extra margin to finance another position, withdraw from your account or simply leave it in your account. There are also companies like Capital Spreads and Financial Spread where you do not have to maintain the required margin (you are still required to have enough cleared funds on your account to open a bet), since you don't have to maintain the margin you cannot free it up.
Make sure you understand the margin requirement before opening a bet.
NOTE: NTR implies that you have to maintain the margin, whereas Min IMR implies that you don't.
Example - Margin with 'NTR' and 'Min IMR'
You open a position of £10 per point with £100 margin on the Daily FTSE. You will be entering into a position that carries NTR or Min IMR of £1,000 (NTR for Daily FTSE is 100 x £10 per point). Therefore you would be required to pay a minimum of £1,000 as an initial deposit to cover the NTR, (Min IMR) before you place the trade. However, it should be noted that you are required to maintain the necessary NTR over and above any marked to market losses. Therefore, should your position deteriorate and your open position was realising losses of £500, you would be called for an additional deposit of £500, whereas with Min IMR you would not be required to add funds.